Question 1

Mortgage-backed bonds (MBB) differ from pass-throughs and CMOs in which of the following ways?

Accepted Answer

A) The MBB bondholders have a junior claim to assets of the FI. 
B) There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB. 
C) The assets backing a MBB issue are normally removed from the balance sheet of the FI. 
D) Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue. 
E) None of the options.

Question 2

A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

Accepted Answer

A) True 
 B)False

Question 3

An FI funds a $5 million residential mortgage in 2017 by allocating capital and by issuing demand deposits.The mortgage represents a loan-to-value of 70 percent.The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points. What is the minimum capital requirement on the mortgage in order for the institution to be adequately capitalized?

Accepted Answer

A) $0. 
B) $400,000. 
C) $200,000. 
D) $500,000. 
E) $5,000,000.

Question 4

Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be non-assumable if the property is sold.

Accepted Answer

A) True 
 B)False

Question 5

The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

Accepted Answer

A) True 
 B)False

Question 6

Servicing a pass-through security refers to

Accepted Answer

A) an FI processing of all payments. 
B) an FI provision of clearing services to set up the pass-through. 
C) broker/dealer services provided by the FI to the ultimate holders of the pass-through. 
D) guarantee by the FI of all principal and interest payments. 
E) an FI provision of liquidity services to the ultimate holders of the pass-through.

Question 7

Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern?

Accepted Answer

A) The age of the mortgage pool. 
B) Geographic location. 
C) Seasons in the year in which the mortgage was originated. 
D) Full or partial amortization of the payments. 
E) Assumability of mortgages in the pool.

Question 8

Which of the following is an example of a negative duration asset that is valuable as a portfolio-hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship.

Accepted Answer

A) PO strip. 
B) IO strip. 
C) Class B bonds 
D) Class Z bonds 
E) Class A bonds

Question 9

Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate, are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

Accepted Answer

A) True 
 B)False

Question 10

GNMA will sponsor any pool of loans regardless of the size of each individual loan in the pool.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is not accomplished by securitization of assets?

Accepted Answer

A) Increases the liquidity of assets. 
B) Provides a new source of funds. 
C) Increases the costs of monitoring. 
D) Decreases the duration of assets. 
E) Decreases the costs of regulation.

Question 12

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security.

Accepted Answer

A) True 
 B)False

Question 13

Which type of loans are securitized most often?

Accepted Answer

A) Residential mortgages. 
B) Credit card loans. 
C) Auto loans. 
D) Student loans. 
E) Commercial and industrial (C&I) loans.

Question 14

In constant prepayment rates (CPRs), the prepayment speed of the security in question is constant or, the timing of the prepayments doesn't adhere to defined patterns.

Accepted Answer

A) True 
 B)False

Question 15

A bond sold to investors whose cash flows reflect the monthly interest payments received from a pool of mortgages is referred to as an OI strip.

Accepted Answer

A) True 
 B)False

Question 16

Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link between the cash flows on the mortgages and the interest and principal payments on the bonds.

Accepted Answer

A) True 
 B)False

Question 17

An interest-only (IO) mortgage-backed strip is a rare example of a negative duration asset.

Accepted Answer

A) True 
 B)False

Question 18

Why are the class C bonds of a CMO highly attractive to insurance companies and pension funds?

Accepted Answer

A) Because of their ability to offer perfect prepayment protection. 
B) Because of the shortest average life with a minimum of prepayment protection. 
C) Because of their long expected duration. 
D) Because they are basically zero coupon bonds and hence carry a minimum amount of risk. 
E) Because of their ability to offer perfect prepayment protection and because they are basically zero coupon bonds and hence carry a minimum amount of risk.

Question 19

These bonds of a CMO have some prepayment protection and expected durations of five to seven years depending on the level of interest rates and are primarily purchased by pension funds and life insurance companies.

Accepted Answer

A) Class A bonds. 
B) Class R bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class B bonds.

Question 20

The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

Accepted Answer

A) True 
 B)False

Exam 27: Securitization

Mortgage-backed bonds (MBB) differ from pass-throughs and CMOs in which of the following ways?

A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be non-assumable if the property is sold.

The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

Servicing a pass-through security refers to

Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern?

Which of the following is an example of a negative duration asset that is valuable as a portfolio-hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship.

Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate, are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

GNMA will sponsor any pool of loans regardless of the size of each individual loan in the pool.

Which of the following is not accomplished by securitization of assets?

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security.

Which type of loans are securitized most often?

In constant prepayment rates (CPRs), the prepayment speed of the security in question is constant or, the timing of the prepayments doesn't adhere to defined patterns.

A bond sold to investors whose cash flows reflect the monthly interest payments received from a pool of mortgages is referred to as an OI strip.

Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link between the cash flows on the mortgages and the interest and principal payments on the bonds.

An interest-only (IO) mortgage-backed strip is a rare example of a negative duration asset.

Why are the class C bonds of a CMO highly attractive to insurance companies and pension funds?

These bonds of a CMO have some prepayment protection and expected durations of five to seven years depending on the level of interest rates and are primarily purchased by pension funds and life insurance companies.

The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.